When Investing in CEOs, It Takes One to Know One

GUEST MENTOR Todd McKinnon, founder and CEO of Okta: Just as some of the best coaches today have turned their playing careers into successful coaching careers, the same is true of some of the most successful venture capitalists.

Ben Horowitz (cofounder of Loudcloud), Aneel Bhusri (founder of Workday) and Reid Hoffman (founder of LinkedIn) each successfully leveraged their operational roles to nurture emerging companies and up-and-coming CEOs, showing that good coaching can make all the difference (and can result in hefty returns, too).

Turning around a hopeless San Francisco 49ers franchise was nothing for head coach Jim Harbaugh. Since leaving Stanford University two years ago, Harbaugh has led the 49ers to 25 wins, two division titles and two NFC Championship games. He also revived Alex Smith and molded his replacement, Colin Kaepernick, into a burgeoning elite quarterback. (Forgive the sports analogy, but I’m a lifelong 49ers fan, and we’re one win away from the Super Bowl.)

There are parallels between successful quarterbacks-turned-successful-coaches to successful founders-turned-successful venture capitalists. The best VCs see opportunities where others see nothing, and apply their in-the-trenches experience (in Harbaugh’s case, it was his tenure as an NFL quarterback from 1987-2001) to coach them to victory. They’re not all that different, really, coaches and VCs. A coach’s goal is to get the most out of each player, to maximize their strengths and to improve their weaknesses. VCs push their portfolio CEOs to succeed — and the best ones use their own experiences as a guide.

The best venture capitalists are equally adept at investing as they are at building and running companies for three reasons.

They’ve Been in Your Shoes – And Crossed The Finish Line. CEOs-turned-VCs have experienced many of the same emotions as the founders they’ve invested in. No matter the industry, there are certain growing pains and challenges nearly all startup founders face. Whether it’s dealing with the loneliness at the top, making the company’s first few hires or dealing with whether to sell, VCs who have been in their founder’s shoes can empathize, console and coach.

They also know how to grind it out and realize that building a large, successful business is not always linear. Ben had to pivot a public company in Loudcloud to a new business in Opsware (and then sold it to HP for $1.6 billion), while Aneel saw PeopleSoft through a hostile takeover in 2004. There’s no reason to get spooked at the first — or second, or third — fork in the road. Those that do don’t make it very far.

They’ve Done it Before – and Can Help You Pull it Off (Without Meddling). VCs with rich operational backgrounds are full of practical advice on the nuts and bolts of running a company. They’ve had firsthand experience in creating a separate product line, outflanking a competitor, putting together a company-changing partnership and entering a new market. Not only can this save your company time, it can also save you from repeating the mistakes they’ve made themselves or seen others make. Setbacks mean playing catch-up, which in the startup world where timing is everything, can make or break your company.

The best VCs also understand that investing is not operating.They back off their companies when they see they’re doing more harm than good. But they’re always on the sidelines to help when needed.

They Know Good People – Not Just Connections on LinkedIn. VCs who have started companies more than likely have a close network of people they’ve been in the trenches with. They can provide valuable introductions when you’re looking to build your core team. And they have tremendous credibility with customers and potential employees that can help close deals and sign recruits. Plus, when they refer someone to you, it’s often not just someone they met at Fortune Brainstorm or D Conference, but someone with whom they’ve worked closely. It’s not, “I met this guy once and he seemed smart,” but “I worked with this person and here’s what he or she can do.”

When you’re looking to build out your company’s core team, getting the right people is essential. When Ben Horowitz, for example, talks about creating a company culture, people listen. He didn’t read about it in business school — he did it.

In the NFL, a team is judged by wins and losses. In venture capital, firms are judged by returns and successful exits. We’ll see over the next several years which venture capitalists take home the trophies. My money is on the investors who created companies of their own first.

About The Accelerators

For aspiring or actual entrepreneurs, The Accelerators is an online archive of discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. Although the blog is no longer being updated, its content lives here and you can see an archive of its tweets through June 2015 @wsjstartup.